FLIR Reiterates at Neutral

We recently maintained a Neutral recommendation on FLIR Systems Inc. (FLIR - Analyst Report).

FLIR Systems Inc. is an Oregon corporation and was incorporated in 1978. FLIR Systems Inc. is a leader in design, manufacture and marketing of thermal imaging systems. The company’s products are used in a wide variety of applications in commercial, industrial and government markets, internationally as well as domestically. It offers a variety of system configurations to suit specific customer requirements. Its business is organized into three divisions: Government Systems, Commercial Vision Systems and Thermography Products.

On October 20, 2011, the company came out with its third-quarter 2011 earnings per share from continuing operations of 40 cents, above prior-year earnings of 39 cents. Earnings in the quarter were affected by net after tax impact of severance cost, excluding which earnings per share came in at 43 cents. The Zacks Consensus Estimate was 37 cents.

Total revenue was $371.3 million, an increase of 12% year over year. FLIR’s revenue increased in both its division, adding to total revenue growth. Total backlog at the end of September 30, 2011 was about $546 million, up $60 million during the quarter.

Commercial Systems division was $196.4 million, up 16% year over year. Government Systems division was $174.9 million in the quarter, up 7% year over year.

Though the company’s TVM segment sales increased by 10% year over year, it was affected by a drop in sales of security products. Dollars booked from security products declined 20%, driven by orders of uncooled cameras. The company witnessed a drop in sales for cooled cameras due to an international board of security order received in the third quarter of 2010.

FLIR Systems reaffirmed its earnings per share outlook in the range of $1.33 to $1.38 for 2011. Excluding the net after tax impact of the second quarter litigation settlement and third-quarter severance costs, earnings per share is expected to be in the range of $1.50 to $1.55. The company expects 2011 revenue to be in the range of $1.55 billion to $1.6 billion, down from its prior guidance of $1.6 billion to $1.65 billion.

FLIR Systems is witnessing increased interest for its solutions across many governments and agencies. The company’s competitive advantage lies in its ability to provide highly capable and rapidly obtainable products with prices and customer service that are better than its competitors.

The company has developed extensive competencies in the design and integration of numerous capabilities and payloads into integrated systems or sub-systems. Competencies such as stabilization, packaging and systems integration allow it to effectively combine a wide variety of technologies and payloads to design and manufacture complex systems to suit its customers’ needs.

However, FLIR derives significant revenue from contracts or subcontracts with the U.S. government agencies. A significant reduction in the purchase of its products by these agencies would have an adverse impact on its business.  The funding of contracts awarded to the company depends on the overall budget of the United States government and appropriation process, which is beyond its control. Major competitors of FLIR Systems are L-3 Communications Holdings Inc. (LLL - Analyst Report) and Lockheed Martin Corporation (LMT - Analyst Report).

We expect the company to perform in line with the market and hence maintained a Neutral recommendation.

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